The purpose of this article is to explain the meaning of Catallactics while deepening the idea of the market as an expression of the capitalist social order. We will do so by presenting in a very simplified way the thinking of Adam Smith (1723 – 1790) and that of Friedrich Hayek (1899 – 1992).
1. From Adam Smith to Friedrich Hayek
Political economy is born with the implantation of capitalism and has in Adam Smith its foundational framework. He inaugurates it with a systematized interpretation of the capitalist social order, observing it from the point of view of production, accumulation and surplus, and from the point of view of the market.
Smith’s solution of the invisible hand, in which private interests instead of clashing produce social welfare, opposes and overcomes previous social contract formulations to account for the emergence of the incipient social liberal order of its time.
* The invisible hand is a metaphor that points to the market economy as a tool to achieve social welfare while seeking self-interest. It appears in his work “The Theory of moral sentiments” of 1759 and in “The wealth of nations” of 1776.
Adam Smith, in offering the market solution as an explanation for the emergence of social order, defines the design of economics as a science, while dialoguing with the central philosophical question of its moment: how to understand the emergence of social order without resorting to divine explanation “When angels are expelled from heaven, man ceases to provide an explanation of the physical order and a form of intelligibility for the social order.”
Hayek follows Smith and produces a theory of the market that translates into a theory of society. In addition, it goes beyond the limits of the economy to place itself in the plane of social philosophy and the theory of history.
Hayek has constructed a current market theory, much more seductive than the heavy mathematical models of neoclassicism (or Neo-Keynesianism), and that, therefore, one can still see today the influence that his theory exerts in some academic circles and in the diffusion to society in general in the idea of the market as a solution to the impasses experienced by the social order of capitalism.
Hayek was the mentor of the Mont Pelerin Society, Switzerland, in 1947, which included, among his thirty-seven illustrious participants, Karl Popper, Lionel Robbins, Milton Friedman, Fritz Machlup, Frank Knigth, Ludwig von Mises, Michael Polanyi and Maurice Allais. The Society of Mont Pelerin, which presided over 14 years, aimed to address the post-war moral, intellectual and economic crisis through a political-economic project whose foundation was the freedom of a people in the context of open societies or large societies. The enemies of this open society were the totalitarian regimes of fascism and Stalinism.
2. About Catallactica
The term catallactica comes from the Greek katallasso (καταλλάσσω) and has three meanings:
- Admit or be admitted to the community
- Change, from being an enemy to a friend
Point 1 leads us to rethink exchange as any relationship between two or more persons acting spontaneously and hoping to obtain some reward from that relationship, which will be maintained if their hopes are confirmed.
Point 2 refers to Adam Smith’s notions of sympathy (1759). For him sympathy was the attitude that leads each person to put himself in the shoes of the other (we today call it empathy). It means inclusion. Let everyone be admitted to the market. It is a necessary condition for the market to work.
Point 3 highlights the need for individuals to yield to their interests, so that the relationship of enmity becomes friendship. With enemies is not negotiated, war is made. The process of the market implies that the enemy happens to be friend. The order of the market is then possible between friends. (Enemy – Customer – Friend?) …
Catalyze is a theory about how a free market fixes prices and exchanges in a mechanism of spontaneous order, which normally occurs without the need for common objectives or planned between economic agents.
Its objective is the analysis of all the actions and all the phenomena that happen in the market with all its roots, ramifications and consequences. There is no doubt that the people who participate in a market are motivated, not only by the desire to get food, tools, housing, etc., but also by multiple ideals. Human actions have to do with both material and immaterial things. The person chooses between several alternatives, regardless of whether they are classified as materials or not (see our previous article Market, Part One).
Catalyze is based on the economic calculation and allows to trace in a market what has been the formation of prices to the point where the economic agent decides, thus, tells us the market prices as they are, not as they should ideally be. The laws of catallactics are not value judgments but pretend to be exact rules, objective and endowed with universal validity.
The concept was systematically employed for the first time by the Austrian economist Ludwig von Mises (1881-1973). His student Friedrich Hayek used the term “catallactica” to describe “the order that arises through the reciprocal adjustment of many individual economies in a market.”
Catallactica presents the complex phenomena of the market as “the results of countless actions, choices and conscious and intentional preferences of individuals, each of whom, under certain circumstances, tries, to the greatest extent possible, to achieve different goals and desires and avoid unintended consequences ”
These individual choices are the ultimate regulators of the market and determine both supply and demand as well as prices and profits and losses. Although governments may try to set prices, the ultimate word is held by individual actions through their competitive efforts to secure money and goods and services.
Hayek was uncomfortable with the use of the word “economics” whose Greek root, which translates as “household management”, meant that the economic agents in a market economy shared ends or objectives, so he speaks of Catalan and the science of praxis, Praxeology, which is, according to the Austrian School the “Science of human action“, of which economics is only a part.
The resulting order of society projected by Hayek is a spontaneous order, the favored daughter of the catalytic, a transcendental structure, or a category inaccessible to the reason conserved by him in the myth of the invisible hand. The origin of the katallasso means to change, but the game of catalaxia, for Hayek, is more than an exchange: it is the game of competition, par excellence, the only way to generate wealth.
In his theory of cultural evolution there is a process of social learning in which it is understood that the more part of society becomes more complex, the more correct and spontaneous are the rules, the rules that reaffirm the catalytic play of the market.
In this theory, Hayek states that his goal is to explain how the process works without trying to explain its results or predict its course. Reason and culture, for him, develop together. Criticizing what he calls Marx‘s prophetic discourse, he will say: “Society must not be oriented toward an eschatological end” (Hayek, 1973, 1988).
We are sure that the values of Catalaxia (exchange, welcome and friendship) and other values will be at the foundation of the new economy for the coming society.
A reduced version of this post was published in the magazine Emporion No. 131. November 2017.
If you want to know more … (See additional bibliography in Markets, Part one).
Mises, von L. (1949) Human Action. Yale University Press, New Haven.
Smith, A. (1759) The Theory of Moral Sentiments. Clarendon Press, Oxford, 1976.
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. Ed. Cannan, Londres; Modern Library, New York, 1937.
Pérez López, J.A. (1991) Teoría de la acción humana en las organizaciones. La acción personal. Rialp. Madrid.
Hayek, F.A. (1973) Law, Legislation and Liberty (3 Volúmenes). University of Chicago Press, 1978.
Hayek, F.A. (1988) The Fatal Conceil: The Errors of Socialism. London. Routledge, 1990.